Credit Card Debt Negotiation in 3 (Not) Easy Steps
6/8/2009
Source: By Dana Dratch, CreditCards.com

"It's not easy," says Ira Rheingold, executive director of the National Association of Consumer Advocates.

Not only are you facing a series of phone calls, you also have to wrestle with details that might not seem important now, such as the impact to your credit and next year's tax bill.

There are only three steps to renegotiating debt, but they're looooooong ones.

Step 1: What solution will work?
Determine what kind of arrangement would work best for you. There are four chief ones: lump-sum settlement, workout arrangement, debt management plan and forbearance. Here's how each works:

Lump-sum settlement. If you have access to a chunk of money, you can try to negotiate a settlement for less than the full amount owed. Frequently, you can break the sum into three payments.

* What you need to know: This impacts your credit score equal to a charge-off, says Barry Paperno, consumer operations manager for FICO, the company that pioneered credit scoring.

If you're negotiating for a lump-sum settlement, be clear that this will be the total amount to satisfy the bill.

Workout arrangement. Under a workout, the bank eliminates or lowers your interest rate and often stops assessing punitive fees (such as late fees or over-limit charges). The terms of the program may be temporary (to help you get back on your feet) or permanent (until you've paid the entire balance).

* What you need to know: Your credit line will likely be cut, so you can't use the card. You can also ask the company to forgive past punitive fees to further reduce your balance (which it may or may not do). The impact to your credit score will depend on how the issuer reports the arrangement or your payments to the credit bureaus. Also, if your credit line is cut, that will ding your score unless you're already maxed out. If the company reports that you're making full, timely payments, however, that will help your credit score and history.

Debt management program. If you don't want to negotiate with the company directly and you need help with all of your credit cards, you can opt to go through a debt management program. Best bet: an agency affiliated with the National Foundation for Credit Counseling or the Association of Independent Consumer Credit Counseling Agencies. A counselor will meet with you and make arrangements with all your creditors on your behalf.

* What you need to know: All your card accounts will be included in the program and closed. While being in a debt management program by itself won't hurt your credit, shutting down accounts is likely to hurt your score -- unless all are maxed out anyway -- because you're harming your credit utilization ratio, a key component of credit scores. Still, it's a smarter, more score-friendly option than bankruptcy.

When it comes to the counseling, "quality can vary around the country," says Chris Farrell, economic editor of the radio show "Marketplace Money" broadcast on National Public Radio "But they're honest."

Steer clear of for-profit debt settlement companies, consumer advocates say, and beware of nonprofits that are really for-profits in disguise. "A nonprofit shouldn't be charging you anything until it's settled," says Ira Rheingold, executive director of the National Association of Consumer Advocates.

Typical cost of a debt management plan through an accredited agency: $30 one-time setup fee, and $15 per month while you're on the plan. Plus, they don't turn you away if you can't pay. In addition, as the recession deepened, the top credit card issuers have become more generous in their debt management plans.

A forbearance program, which offers breathing room for a few months while you get back on your feet.

* What you need to know: You will still pay every penny you borrowed, and possibly more. Forbearance programs offer a brief break from full payments, not forgiveness of any debt.